Financial Sector 'Joint Agreement for Supporting Credit Recovery of Low-Income Borrowers'
Full Repayment Targeted for Small Delinquents Under 20 Million KRW
Encouraging Debt Repayment...Improving Access to Financial Services Like Cards
The financial sector is launching a 'credit pardon' for about 2.9 million small-scale delinquent borrowers. As an extension of credit recovery support during the COVID-19 period about three years ago, it was decided to restrict the sharing and use of delinquency history information for small-scale delinquent borrowers who have fully repaid their overdue amounts.
Although concerns about moral hazard and fairness issues with regular borrowers who repay their debts on time persist, authorities explain that this is an unavoidable measure to help delinquent borrowers return to economic activities amid the ongoing triple high (high interest rates, high inflation, and high exchange rates) following the COVID-19 crisis.
On the 15th, financial industry associations, the central association, the Korea Credit Information Services, and 12 credit information companies signed a 'Joint Agreement for Credit Recovery Support for Low-income and Small Business Owners' at the Bankers' Hall in Jung-gu, Seoul, attended by Financial Services Commission Chairman Kim Joo-hyun and Financial Supervisory Service Governor Lee Bok-hyun. This follows discussions at the civil-party-government (民·黨·政) council held on the 11th.
Previously, the government supported credit recovery for low-income individuals and small business owners in August 2021 during the ongoing COVID-19 pandemic. However, as the effects of COVID-19 have continued and exceptional circumstances such as the triple high phenomenon have persisted recently, the need to re-promote credit recovery has increased.
Accordingly, the financial sector decided to support credit recovery by restricting the mutual sharing and use of delinquency history information for individuals and sole proprietors who have fully repaid all small-scale delinquencies on loans incurred between September 1, 2021, and January 31, 2024, by May 31, 2024.
Small-scale delinquency is set at the same threshold as the 2021 support, which is '20 million KRW or less.' This applies to all types of credit extended, including delinquency, subrogation, and payment guarantee information registered with the Korea Credit Information Services and credit rating agencies, where the registered amount is 20 million KRW or less.
Under this agreement, credit information companies will restrict the sharing of delinquency history information for borrowers who have faithfully repaid their debts and will not use it for credit evaluation. The Korea Credit Information Services will also limit the sharing of delinquency history information for those eligible for credit recovery support. Furthermore, the financial sector will minimize disadvantages in loan conditions such as interest rates and limits, even if they use delinquency history information for credit evaluation and loan screening of their customers.
The financial sector expects that through this agreement, the sharing and use of long- and short-term delinquency history information for about 2.9 million individual borrowers will be restricted, significantly improving access to financial transactions. It is anticipated that the credit scores of about 2.5 million eligible individuals (based on NICE Credit Rating) will increase by an average of 39 points to 701.
Additionally, after credit recovery support, 150,000 more people are expected to meet the minimum credit score (645 points) required for card issuance, making card issuance easier, and 250,000 more are expected to exceed the average credit score (863 points) of new bank loan applicants, improving loan accessibility.
The financial sector plans to restrict the sharing and use of delinquency history information as early as the beginning of March through changes and application of IT infrastructure related to this credit recovery support. Also, once the eligible individuals are confirmed, the financial sector will establish a separate system to verify eligibility through credit rating agencies.
Chairman Kim said, "It is necessary for our society to give a chance for recovery to those who fell into delinquency due to abnormal external environments such as COVID-19 and the unprecedented continuation of high interest rates and inflation, aside from personal circumstances." He added, "As up to 2.9 million people are expected to benefit from the deletion of delinquency records through this credit recovery support, please prepare for swift implementation, including IT development, so that low-income individuals and small business owners can return to normal economic life as soon as possible."
Governor Lee also stated, "This credit recovery support will help low-income individuals and small business owners in difficult situations return to normal financial life, and since it targets borrowers who have fully repaid their debts, it is expected to encourage debt repayment. The Financial Supervisory Service will actively support smooth implementation."
However, controversy over 'moral hazard' is inevitable regarding this credit recovery support. Issues of fairness with borrowers who have faithfully repaid their debts are also difficult to avoid.
A financial authority official said, "It is true that there are fairness issues, but the COVID-19 situation has continued even after the previous support, and the reality is that more people are inevitably becoming delinquent due to the triple high crisis. The purpose is to quickly help those who have inevitably become delinquent return to normal economic activities, which also benefits the healthy recovery of our society."
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